July 19, 2012

Nordic banks see Europe's economic woes creeping closer

Nordea, the Nordic region's biggest bank, and rival Swedbank are bracing for tougher conditions as Europe's debt problems creep into their safe-haven home markets, hurting business and squeezing margins.

Both banking groups reported on Wednesday second-quarter operating profits just above analyst forecasts, with core net interest income beating expectations and capital buffers swelling even further. Nordic banks have consistently outperformed their peers in other parts of Europe as a result of a healthy economic backdrop at home and strong balance sheets which have guaranteed them non-stop access to international money markets.

But this week, the banks sounded words of caution. "Even if the Nordic region stands out as a more stable part of Europe, most countries still face declining economic growth," Nordea Chief Executive Christian Clausen said.

"The lower activity level is gradually reducing consumption and investments, which means that the demand for loans and other banking services in the Nordic market is low." Operating earnings in the second quarter at Nordea rose 16 percent to 1.10 billion euros ($1.3 billion), compared with a forecast for 945 million in a Reuters poll.

Crucially, Nordea's loan losses were less than forecast. "All items provided a positive surprise," said Kimmo Rama, an analyst at Evli Bank. "The key focus was on loan losses given the exposure to Denmark and shipping. But Danish loan losses declined and there were no major surprises in shipping-related loan losses, so over all I think it was a strong report." Nordea's share rose 2.3 percent by 0742 GMT, outperforming a slightly weaker Stockholm blue chip index. Low key policy rates in Sweden due to sharply slower growth as overseas demand eases are pinching bank lending margins at a time when banks are being forced to hold more capital.

Swedbank said the macroeconomic outlook remained uncertain in Europe, where a sovereign debt crisis has weighed heavily on the economy and jarred banks across the region. "The second quarter was characterised more by the European debt crisis and its effects on the economy. In Sweden, we had signs that we are going to get lower economic activity, and there is less confidence in a rebound," CEO Michael Wolf told journalists on a call.

Operating profit at the bank was 4.22 billion Swedish crowns, compared with a forecast for 4.12 billion and down from 4.32 billion in the 2011 period.

Swedbank shares were up 0.2 percent at 0723 GMT. Swedbank said it was difficult to provide accurate earnings guidance. It plans for a weak scenario and will focus on its plan to cut costs by one billion crowns this year.

Swedbank's Chief Financial Officer, Goran Bronner, said on an analyst call the bank did not expect higher costs next year. Nick Davey, an analyst at UBS, said good cost control was a highlight in the quarter.

"Management is showing a very strong capacity to manage costs and stick to their original guidance of a billion lower costs," he said. Swedbank, the biggest bank in the Baltics, was upbeat about the outlook for Estonia and Lithuania and said it expected further recoveries of provisions for losses in the region.

Net interest income at both banks topped forecasts. On Monday, strong earnings at SEB sparked a rally in Swedish banking shares but Tuesday's disappointing core income at Handelsbanken returned investor focus to weak margins.